News & Views

01/06/17

DOF thanks House for final OK of TRAIN bill

The Department of Finance (DOF) thanked the House of Representatives for approving on third and final reading the proposed Tax Reform and Acceleration and Inclusion Act (TRAIN) and expressed optimism that, with President Duterte declaring it as an urgent measure crucial to his administration’s massive expenditure program, the Senate would similarly pass the measure soon enough when the 17th Congress reopens for its Second Regular Session in July.

A total of 246 lawmakers voted in favor of TRAIN, with nine against and one abstention.

Finance Undersecretary Karl Kendrick Chua said the DOF will present its case before the Senate in July with the hope that senators would retain TRAIN in its original form.

The original DOF-endorsed version outlined in House Bill No. 4774, which was authored by Quirino Rep. Dakila Carlo Cua, was consolidated with 54 other-tax related measures into the substitute bill HB 5636, which is now the TRAIN.

The 17th Congress will end its sine die adjournment on July 24, when President Duterte is to deliver his second State of the Nation Address (SONA).

President Duterte has certified as an urgent measure the proposed TRAIN because it will help ensure the financial sustainability of the government’s ambitious agenda to sustain the country’s growth momentum and accelerate poverty reduction via a massive spending on infrastructure, human capital and social protection for the poor and vulnerable sectors.

In separate letters sent to Senate President Aquilino Pimentel III and Speaker Pantaleon Alvarez, the President said: “The benefits to be derived from this tax reform measure will sustainably finance the Government’s envisioned massive investments in infrastructure thereby encouraging economic activity and job creation, as well as fund the desired increase in the public budget for health, education and social programs to alleviate poverty.”

Finance Secretary Carlos Dominguez III said TRAIN aims to make the country’s antiquated tax system simpler, fairer and more efficient, especially for the poor and low-income families, by making sizable cuts in personal income tax (PIT) rates—and to make up for the projected revenue loss, and at the same time raise funds for the Duterte administration’s massive expenditure program, by expanding the Value Added Tax (VAT) base and adjusting excise taxes on oil, automobiles and other products.

Dominguez pointed out in his earlier memo to the President that the “dire consequences” of the Congress’ failure to pass soon enough this TRAIN bill, given its design to help guarantee a steady revenue flow for the Duterte administration’s unmatched public investments over the next half-decade to support its envisioned “Golden Age of Infrastructure,” attract investments and create jobs, cut the poverty rate from 21.6 percent to 14 percent, and transform the Philippines into an upper middle-income economy by the time the President leaves office in 2022.

Chua said the DOF-endorsed first package of the CTRP now pending in the Congress is the key to making the economy truly inclusive and helping the poorest Filipinos rescue themselves from the poverty trap.

“In the next six years, the Duterte administration seeks to liberate six million Filipinos from poverty and transform the country from a lower middle-income to an upper middle-income economy by 2022, like Thailand and China today, and onwards to become a prosperous country where no one is poor by 2040, that is one generation from today, the generation of our children or grandchildren–our future,” he said.

Chua said attaining inclusive growth and getting the private sector to invest more is to undertake an unparalleled “Build, Build, Build” infra program, complemented by massive investments in the country’s human capital.

These unparalled investments from 2016 to 2022 totalling P2.2 trillion will require an additional P718 billion for education, P139 billion for health, P267 billion for social welfare, and P1.1 trillion for urban and rural infrastructure.

“All these require new revenues, but we will share the responsibility together. The executive commits to improving tax collection efficiency and addressing smuggling, while fully spending the budget as planned. All these are currently happening. We will also borrow because the conditions are right and our infrastructure needs are vast. Our supporters also commit to paying the right amount of taxes,” he said.

Such measures, however, are not sufficient to keep the government’s ambitious spending program fiscally sustainable, Chua said.

“We also need tax policy and we ask Congress to pass a program of tax reforms that will once and for all correct the complexity, inefficiency, and inequity of our tax system that holds back economic growth, job creation and poverty reduction,” he added.

Chua enumerated the following reasons the country is in “dire need” of tax reforms:

Personal and corporate income tax rates are much higher than the rest of the region, eroding the income of the people and making the country uncompetitive;
The VAT system is awash with more than 140 lines of exemptions, leading to massive leakages estimated at more than P500 billion, which cannot be solved by improving tax administration alone, as the core problem lies in these exemptions that give rise to discretion, and thus corruption and tax evasion;
Excise taxes on oil products have not been adjusted to inflation for 20 years now, causing P145 billion in foregone revenues annually;
Automobile excise taxes have not been adjusted for 13 years, making those who can afford to pay contribute much less to the tax system; and
Laws on bank secrecy prevent the Bureau of Internal Revenue (BIR) from conducting proper audits and ironically encourage tax evasion.

He said the CTRP aims to correct these regressive features of the tax system.

Chua pointed out that the CTRP also has a social welfare component “to ensure that those in need are taken care of.”

“The greater revenue that will be gained from taxing the rich will be used to fund social services and targeted transfers that benefit the poor,” he said. “The gains will be greater than the losses, and the low-income Filipinos will benefit the most once the tax reform, the transfers, and the pro-poor spending program are taken together.”

Chua also allayed concerns raised by legislators over the proposed hike in the excise taxes of petroleum products, pointing out that the gradual increase over three years under the “3-2-1” formula is “actually a progressive measure as the top 10 percent of families consume 51 percent of fuel and transport costs, while the top one percent of families consume 13 percent.”

The 13 percent in fuel and transport costs credited to the country’s top one percent is the same share consumed by the bottom 50 percent of families, Chua noted.